Russia Can Be A Lucrative Market For Abercrombie's European Business

For some time now, Abercrombie & Fitch has been
struggling in Europe due to sluggish economic growth and
self-cannibalization

Last year, it decided to slow down expansion in the region
and target only under penetrated markets

The company is yet to enter Russia which provides much room
for growth for foreign retailers

With relatively low competition, great potential for online
growth and relatively higher per capita spending on apparel,
Russia offers a very attractive opportunity for
Abercrombie

Teen apparel retailer
Abercrombie & Fitch
(
ANF
) is struggling in the U.S. and Europe alike. While less popular
merchandise, a mixed retail environment and controversies have
troubled the retailer in the U.S., its European business has been
weighed down by sluggish economic growth and self-cannibalization.
Although the company operates about 110 stores in 12 countries in
Europe, over expansion in tourist locations has led to
self-cannibalization.

Last year, Abercrombie decided to slow down expansion in the
region and target only under penetrated markets. While the company
is present in crucial markets such as Germany, the U.K., Spain and
France, it is yet to target Russia. We believe that Abercrombie
should enter the region soon enough since the region is somewhat
untapped by foreign retailers and offers high growth potential.

The apparel market in the U.S. is highly saturated and
competitive, with a good number of established brands. Moreover,
sluggish economic growth has affected the industry as well. This
year in particular, apparel retailers have struggled to achieve
positive growth as cautious consumer spending and a change in
spending patterns have weighed on sales. Moreover, teen buyers have
been readily changing the brands they favor as trends change
without anticipation, which has troubled a number of players. Along
with several other retailers, Abercrombie has been at the receiving
end of these changes. Its comparable stores sales have declined
considerably during the last year and a half, and the near-term
outlook isn't looking good either.

It therefore becomes important for Abercrombie to focus on
international expansion to diversify its business risks
geographically. Presently Europe appears to be the most viable
expansion option since Abercrombie is already a well-known brand
there. Moreover, the region holds just 7% of the company's store
fleet but contributes more than 20% to its revenues. It makes sense
for Abercrombie to continue expanding in its existing markets based
on opportunities they provide, as well as explore new markets that
hold good growth potential for foreign brands.

Abercrombie Should Expand In Russia

In recent quarters, the apparel and footwear industries in
Russia have grown at a rapid pace ahead of other European markets.
Although average prices have not risen much since the debt crisis,
aggressive expansion by a number of retailers has contributed to
this growth. The year 2012 alone witnessed the entry of 30 new
foreign brands. According to a 2011 McKinsey report, apparel
space per 100,000 Russians is only 37,600 square feet, which is
just 10% of what it is in the U.S. Even Brazil has a larger
average per-store apparel space, despite having lower per capita
income compared to Russia. This clearly justifies the aggressive
expansion strategies adopted by the retailers.

Additionally, Russians spend more freely on clothing than
consumers in other countries. They spend close to 3.1% of
their income on apparel, which is noticeably more than China,
Germany and the U.S. Through 2015, McKinsey expects the
region's apparel market growth (8%) to remain faster than income
growth (7%). However, if Abercrombie decides to enter the market,
it should keep in mind the fact that Russian buyers are more
tempted to buy products at heavy discounts. In 2012, most new
outlets started offering 30%-70% discounts from the outset. An
interesting fact about Russia' apparel market is the robust growth
in the share of online sales. This makes it clear that new players
need to target the e-commerce channel to gain a healthy market
share. Retailers should be encouraged by the fact that the Russian
apparel market is less competitive compared to some of the other
developing regions.

To expand in Russia, Abercrombie can target large Russian
cities such as Moscow, which are located in the central region.
These cities account for about half of Russian GDP and one-third of
its retail sales. Interestingly, out of 20 largest apparel players
in the region, 17 increased their investments in double digits
during 2009-2011.